United sheds pension plans
Bankruptcy court must OK deal; unions express shock over latest move
By John Accola, Rocky Mountain News
Saturday, April 23, 2005
United Airlines reached an agreement Friday with the government's pension protection agency to terminate its employee retirement plans covering 121,500 former and current workers for the bankrupt carrier.
If approved by the bankruptcy court overseeing UAL Corp.'s restructuring, the retirement bailout affecting pilots, flight attendants, mechanics and ground workers would be the largest pension default in U.S. history.
The four employee retirement plans are underfunded by nearly $10 billion. Under the deal, the federal Pension Benefit Guaranty Corp. will take over the plans and their combined $6.6 billion in assets.
The nation's second-largest carrier, which filed for bankruptcy protection 29 months ago, says getting rid of the pension programs and replacing them with 401(k)-style retirement plans would save the airline $640 million annually.
To emerge successfully from bankruptcy, United needs to shave $2 billion in costs. Since filing for Chapter 11, the airline, which accounts for nearly 60 percent of the passenger traffic at Denver International Airport, has already wrangled about $5 billion in annual cost cuts through wage and benefit reductions and operational changes, including the creation last year of low-cost carrier Ted. Its Denver operations employ 6,000 workers.
Labor unions representing United's rank-and-file work force universally declared the settlement a pension sellout. If the pension plans are dropped, losses to plan participants through reduced payments could exceed $3.2 billion, according to some estimates.
Some pilots have qualified for annual pension payments from United totaling more than $100,000 a year but could see that reduced by more than 60 percent.
A 42-year-old flight attendant who's been with the carrier for 19 years and expects to retire at age 56 would be left with 31 percent of an expected pension.
"It's just a royal hose job any way you slice it," said Rich Ford, a 59-year-old United captain in Denver.
In a prepared statement, the International Association of Machinists, which represents nearly 30,000 active and retired United baggage handlers and customer service agents, said it would not tolerate losses in members' earned pension benefits.
"If pension and other issues are not resolved to our members' satisfaction, we are prepared to strike United Airlines," said IAM General Chairman Randy Canale.
"We will use every available and legal means to fight this," said Sara Dela Cruz, spokeswoman for the Association of Flight Attendants.
United spokeswoman Jean Medina said management had hoped to resolve the pension issue with union leaders, but after months of talks, "Unfortunately, no viable solutions were offered or found."
"We understand how difficult this is for our employees" she said. "We have said for some time that we needed to terminate and replace our pensions to be a sustainable and viable company going forward."
United said last August it intended to end the plans. But until now, the federal pension insurer had opposed that, maintaining the action would put too much financial risk on the already strapped agency.
Created in 1974, the PBGC's own balance sheet shows a $23.3 billion deficit, with $39 billion in assets to pay $62.3 billion in guaranteed pension benefits to more than 1 million workers and retirees. By law, the agency has no call on the U.S. Treasury beyond a $100 million credit line.
But perceiving it would be unlikely to overturn United's efforts, the PBGC reasoned Friday it would be better to assume control of the pension plans on its own terms - more quickly than United's proposal - before further benefits accrued.
PBGC Executive Director Bradley Belt said the deal is superior to any settlement it would have received as an unsecured creditor in bankruptcy.
Judge Eugene Wedoff, who is overseeing United's restructuring in Chicago's U.S. Bankruptcy Court, must first approve the agreement.
"I'll consider this agreement when it's presented," Wedoff said in court when informed of the settlement at a hearing Friday.
The PBGC has asked the judge to push back a May 11 hearing on whether United can terminate the four employee pensions.
"We're in shock," said Cruz, just hours after learning of the settlement.
She said the flight attendants' defined benefit pension program is the most affordable of the four United plans. The settlement is a United management-led effort to "short-circuit" the court process and resolve the PBGC's financial claims at the expense of employee pensions, she said.
"We have been talking with the PBGC for a month now to keep our pension plan in place. This was a totally surprising move."
Bill Moons, a United mechanic in Denver and president of the Local 8 aircraft mechanics union, said the proposed settlement is yet another huge blow to employee morale. He expects it to be approved.
"The bankruptcy judge has given United everything they have asked for so far. I'd be surprised if he didn't approve this," Moons said. "We've already lost our employee stock-ownership program, so now we'll be losing basically two forms of our retirement."
More salt in the wound is the $4.5 million retirement package recently approved for Chief Executive Glenn Tilton.
"He's only been there for two years," Moons said.
United's Medina said Tilton was not available to comment. But she defended Tilton's retirement package.
"Mr. Tilton's trust, negotiated with the creditor's committee, and approved by the bankruptcy court was provided in recognition of benefits Mr. Tilton was forgoing to join United," she said.
Four benefit programs to be dropped:
United Airlines' agreement with the Pension Benefit Guaranty Corp. will terminate these four employee pension plans:
• United Airlines Pilot Defined Benefit Plan - covers 14,100 participants and has $2.8 billion in assets to pay $5.7 billion in promised benefits.
• United Airlines Ground Employees Retirement Plan - covers 36,100 participants and has $1.3 billion in assets to pay $4 billion in promised benefits.
• United Airlines Flight Attendant Defined Benefit Pension Plan - covers 28,600 participants and has $1.4 billion in assets to pay $3.3 billion in promised benefits.
• Management, Administrative and Public Contact Defined Benefit Pension Plan - covers 42,700 participants and has $1.5 billion in assets to pay $3.8 billion in promised benefits.
What still needs to happen:
• Bankruptcy Judge Eugene Wedoff must first approve the agreement, and unions are allowed to file concerns with the court.
Source: Pension Benefit Guaranty Corp.
accolaj@RockyMountainNews.com or 303-892-2666.